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Mudarib isn`t Liable for Capital Unless he Committed Misconduct and Negligence

Answered according to Shafi'i Fiqh by Darul Iftaa Jordan
I have entered into a Mudaraba* with someone where he provided the capital and I provided the effort and expertise. However, we took a major loss, so the business was auctioned off. The capital provider demanded that I pay his money and that it is a debt on me. Does he have the right to claim this money from me?

Answer:

All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.

According to Islamic Fiqh, a Mudarib or "Working partner" isn`t liable for the capital in the event of loss save if he committed misconduct or negligence. Imam Taqhi Al-Deen Al-Hosni said: "The working partner is trustworthy because he received the money with the permission of its owner. This way, he is similar to other trustworthy individuals. Therefore, he isn`t liable for that money save in case he committed misconduct and negligence, just like in the case with those trustworthy individuals. 

Misconduct and negligence is committed when the Mudarib "Working partner" acts in a manner that harms the Mudaraba contract, the financier, breaches the requirements of the contract or when he doen`t adhere to what is in the best interest of the investor, and all of  these can only be assessed by the experts. Imam An-Nawawi said: "Just like an agent, the working partner should act in the best interest of the business." {Rawdat at-Talibeen, V.5:127}.

In conclusion, if it was established by experts that the "Working partner" had committed misconduct and negligence, then he is liable for the capital. But, if he was innocent, then he has lost the time and effort invested in the project and the financier has lost his capital, and the latter has no right to claim anything from the former. And Allah the Almighty knows best.  

* Mudarabah or "Sharing the profit and loss with venture capital", is a partnership or trust financing contract (similar to western equivalent of General and Limited Partnership) where one partner (rabb-ul-mal or "silent partner"/financier) gives money to another (mudarib or "working partner") for investing in a commercial enterprise. The rabb-ul-mal party provides 100 percent of the capital and the mudarib party provides its specialized knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. If there is a loss, rabb-ul-mal will lose his capital, and the mudarib party will lose the time and effort invested in the project. The profit is usually shared 50%-50% or 60%-40% for rabb ul mal-mudarib.

This answer was collected from the official government Iftaa Department of Jordan.

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